Ireland is not a low-income tax economy and collects more income tax relative to the size of the economy compared to many of our EU peers.
There have been many calls to raise income tax in Ireland to levels in other countries. What these suggestions fail to acknowledge is how these countries raise more income tax than us. They do so by levying significantly more taxes on low and middle incomes than we do.
It is a common refrain that Ireland is a low-tax economy. This is not true. In 2011, the EU average for tax receipts as a percentage of gross domestic product (GDP) was 26%. The figure in Ireland was 24%, and using gross national product (GNP), which may be a more appropriate measure for Ireland, the figure is 28%. Ireland does not collect a low amount of taxes.
Where government revenue in Ireland does fall short is for social insurance contributions.
Ireland’s only social contribution is pay-related social insurance (PRSI). Although there are different classes, the typical rates are 4% of gross salary for employee contributions and an additional 10.75% of gross salary for employer contributions. PRSI contributions were equal to 5% of GDP in 2011. The EU average for social contributions was 13% of GDP.
PRSI contributions are paid into the Social Insurance Fund and these are expected to be around €7,100m in 2013. Claims on the fund are expected to be €8,600m.
The main expenditures are the contributory state pensions which will cost around €5,500m in 2013. There will be around €1,100m of supports to those in the labour market such as Jobseeker’s Benefit, Maternity Benefit and Redundancy Payments, while around €1,500m of supports will be provided under illness and disability benefits.
Personal income tax revenue in Ireland as a percent of GDP is the eighth highest of the 27 countries in the EU. Ireland collects the equivalent of 9% of GDP in income tax. In 2011, Eurostat reported that there was €14.2bn of personal income tax collected in Ireland with GDP of €156bn. This level is more than Germany, France, Spain and the Netherlands.
There are six EU countries that collect over 10% of GDP in personal income taxes. Unsurprisingly, these include the Scandinavian countries Denmark, Sweden and Finland, as well as Belgium, Italy and the UK.
Ireland has to close the largest budget deficit in the EU. There are many who argue that the gap should be closed with more tax increases, particularly income tax increases on the rich.
The argument usually stops there and what is rarely presented is how those countries who collect more income tax than Ireland achieve it.
So how do the countries generating more than 10% of GDP from income tax achieve it? Research from the OECD allows us to compare the effective income tax rates at different incomes: below average income, at the average income and above the average income. In Ireland, this income levels are €22,000, €33,000 and €55,000.
At present, in Ireland if these incomes are earned by a single person with no children, they will face an income tax plus universal social charge bill of €2,000, €5,000 and €15,000. Through the income levels used, the effective tax rate rises from 9% to 15% to 28%.
At the same relative income levels, the average effective income tax rates in the six ‘high-tax’ countries go from 18% to 22% to 30%.
There would be an increase in income tax at all levels. But below average earners would see their income tax bill double, while above average earners would see their tax bill rise by around one-twelfth. These tax increases would cost someone on €22,000 around €2,000 a year while those on €55,000 would just pay an extra €1,000 in tax.
If we are to align our income tax revenue with high-tax countries there appears little scope to raise additional revenue from high earners. To narrow the gap in the manner they raise tax, we would have to substantially raise taxation on average and below-average incomes.
*Séamus Coffey is an economics lecturer in the College of Business and Law in UCC.
© Irish Examiner Ltd. All rights reserved